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The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 made sweeping changes to the nation's key welfare program for needy families. It established the $16.5 billion Temporary Assistance for Needy Families (TANF) block grant, which provides to the states federal funds to support low-income families and help these families reduce their dependence on welfare. TANF provides states significant flexibility--within federal guidelines--to determine who is to be served and what services to provide. The welfare legislation also fundamentally changed how the federal government funds assistance for low-income families, shifting much of the fiscal risk for welfare programs to the states. Under TANF, states receive a fixed amount of TANF funds each year and, if costs rise, states must find a way of financing the additional costs. To better understand states' spending patterns for TANF funds as the Congress debates the program's reauthorization, the Chairman of the House Subcommittee on Human Resources, Committee on Ways and Means, asked us to provide information on (1) TANF balances, including the amount of funds transferred to states' child care and social services block grants, that remain unspent and (2) the extent to which these balances reflect reserves available for future use.

Based on spending through July 31, 2003--the most recent data available--GAO estimates that the TANF balance will be about $5.6 billion on September 30, 2003. While data were not readily available to project how much of the balance might be comprised of TANF transfers to the child care and social services block grants, we did estimate that unspent transfers represented about 30 percent of the TANF balance for fiscal year 2002. The information available on TANF balances is not sufficient to assess the availability of reserves to help states meet future needs. As a result, it is difficult to determine what portion of any reported balance is already committed or how much is reserved for future use on TANF-related expenditures. The importance of distinguishing between a committed balance and a real reserve becomes more apparent when comparing states. While many states had large balances, others did not. The variations suggest that, at the end of fiscal year 2002, some states may have been better positioned than others to meet current and future needs. While the fixed block grant structure creates opportunities for states to establish reserves for the future and/or expand programs or develop new services when welfare caseloads fall, states can face fiscal challenges when their caseloads or program costs rise. We recently reported that states are in one of the most challenging fiscal crises to confront them in years. Welfare reform ushered in a new fiscal partnership between the states and the federal government and sound fiscal management practices suggest that it would be prudent for states to develop some contingency plans--including establishing reserves from federal funds to meet the needs of their low-income families over time. However, the data currently required of states do not provide sufficient information to assess the adequacy of states' reserves. Reporting requirements should enable collection of data that will assist policymakers in their oversight responsibilities and, while care should be taken to avoid unnecessary reporting burdens on the grant recipients, comparable data on state obligations, expenditures, and reserves of federal funds are critical for effective oversight of federal programs.